What are the factors hindering the development of derivatives market in Kenya?
Other disabling factors to the development of the derivatives market discussed in this paper includes; the level of investor sophistication and awareness is low; lack of commodities on large scale; high frictional costs in the market structure; inadequate risk management; inadequate liquidity; and segmented regulation.
What are the factors affecting the derivatives market?
It found that underlying market size, volatility, and liquidity are the main factors that affect the growth of derivatives markets.
What are the challenges of derivative market development in emerging markets?
Emerging Economies
The most common problems that con- strain the development of local derivatives markets are (1) relatively underdeveloped markets for underlying instruments; (2) weak/inadequate legal and market infrastruc- ture, and (3) restrictions on the use of deriva- tives by local and foreign entities.
What are the problems with derivative markets?
Like any other investment, derivatives' risk levels are calculated through a mixture of evaluation of the market risk that all investments are susceptible to, counterparty risk if a party involved in the trade defaults, liquidity risk of the actual companies being invested in, and interconnection risk between various ...
What are the challenges facing derivative markets in Kenya?
However, since its launch, the Derivatives Market in Kenya has faced quite a number of challenges such as: lack of proper legislative regulations, low-level awareness among potential investors, high frictional costs involved, inadequate risk management and segmented regulations.
What is the derivative market in Kenya?
The derivatives market offers dual opportunities for investors to profit when the market goes up (by initiating a buy/long position) or when the market goes down (by initiating a sell/short position).
What are the 4 main types of derivatives?
The four major types of derivative contracts are options, forwards, futures and swaps. Options: Options are derivative contracts that give the buyer a right to buy/sell the underlying asset at the specified price during a certain period of time.
What is the biggest underlying issue with derivatives?
Loss of flexibility.
The standardized contracts of exchange-traded derivatives cannot be tailored and therefore make the market less flexible. There is no negotiation involved, and much of the derivative contract's terms have been already predefined.
How derivatives caused the financial crisis?
The financial crisis of 2008 exposed significant weaknesses in the over-the-counter (OTC) derivatives market, including the build-up of large counterparty exposures between market participants which were not appropriately risk-managed; limited transparency concerning levels of activity in the market and overall size of ...
Why is it so challenging to market in emerging markets?
Market Volatility: Emerging markets can be more volatile than developed markets due to lower liquidity, limited market regulation, and higher sensitivity to global economic events.
What are the disadvantages of future derivatives?
Future contracts have numerous advantages and disadvantages. The most prevalent benefits include simple pricing, high liquidity, and risk hedging. The primary disadvantages are having no influence over future events, price swings, and the possibility of asset price declines as the expiration date approaches.
How do derivatives affect the economy?
Derivatives make arbitrage between two different assets much easier. In terms of the impact on the real economy, the more preferable risk distribution through hedging combined with the lower cost of capital allows agents to better concentrate on their specific strengths, resulting in larger sustainable growth rates.
What is the main purpose of the derivatives market?
The primary purpose behind derivative contracts is the transfer of risk without the need to trade the underlying. This allows for more effective risk management within companies and the broader economy. In addition, the derivatives market plays a role in information discovery and market efficiency.
What are the three situations where derivatives fail to exist?
The three situations are shown in the following list. A removable discontinuity — that's a fancy term for a hole — like the holes in functions r and s in the above figure. An infinite discontinuity like at x = 3 on function p in the above figure. A jump discontinuity like at x = 3 on function q in the above figure.
What are the challenges Kenya faces that are hindering its economic and political growth?
There are various obstacles to economic development among them; geography and climate, poverty, over-population, poor education and healthcare, international policies, inflation, war, meagre (natural) resources and migration.
How does the Nairobi Securities Exchange market contribute to the economic growth of Kenya?
NSE is playing a vital role in the growth of Kenya's economy by encouraging savings and investment, as well as helping local and international companies access cost-effective capital.
Why do foreign companies invest in Kenya?
Ease of Doing Business
Kenya generally has a more favorable regulatory framework, offering streamlined processes and reforms aimed at attracting foreign direct investment. This is due to the fact that Kenya has embraced foreign investment and its policies have been pro-business since Kenya got its independence in 1963.
Does Kenya have a market based economy?
Kenya has a market-based economy and is generally considered the economic, commercial, financial and logistics hub of East Africa. With the strongest industrial base in East Africa, Kenya has been successful in attracting U.S. exporters and investors.
What are the advantages and disadvantages of derivatives market?
Advantages include hedging against risk, market efficiency, determining asset prices, and leverage. However, derivatives have drawbacks, such as counterparty default, difficult valuation, complexity, and vulnerability to supply and demand.
What are the pros and cons of investing in derivatives?
In summary, financial derivatives are complex instruments that provide many benefits, including hedging, speculation, and diversification. However, they also have the potential to be a source of financial instability, and investors must understand the risks involved before investing in these instruments.
What are the 5 examples of derivatives?
Five of the more popular derivatives are options, single stock futures, warrants, a contract for difference, and index return swaps. Options let investors hedge risk or speculate by taking on more risk. A stock warrant means the holder has the right to buy the stock at a certain price at an agreed-upon date.
Are derivatives good or bad for the economy?
Derivatives are contracts that allow businesses, investors, and municipalities to transfer risks and rewards associated with commercial or financial outcomes to other parties. Holding a derivative contract can reduce the risk of bad harvests, adverse market fluctuations, or negative events, like a bond default.
Are derivatives high risk?
Derivatives can be incredibly risky for investors. Potential risks include: Counterparty risk. The chance that the other party in an agreement will default can run high with derivatives, particularly when they're traded over-the-counter.
How do banks make money on derivatives?
Banks play double roles in derivatives markets. Banks are intermediaries in the OTC (over the counter) market, matching sellers and buyers, and earning commission fees. However, banks also participate directly in derivatives markets as buyers or sellers; they are end-users of derivatives.
What are the risk factors of derivatives?
A derivative contract is long the primary risk factor if the fair value of the instrument increases when the value of the primary risk factor increases. A derivative contract is short the primary risk factor if the fair value of the instrument decreases when the value of the primary risk factor increases.
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